How Do Regulations Fit into Economics?

Here are a few questions for you. What are regulations as they pertain to economies? Can there ever be a completely free market? Can there ever be a completely command oriented economy? What are regulations designed and used for? How do they help and hurt citizens and businesses? These are all great questions and once you know the answers to them, you'll be well on your way to understanding regulations, their benefits, and their detriments.

Many economists describe regulations as the rules by which people, businesses, and economies must play by. We've all heard about regulations. Even when it comes to politics, the term "regulation" is thrown around like nothing else. Washington DC is full of lobbyists who try to either create to remove regulations, depending on who they're lobbying for. Regulations can either make or break a business or industry. They can be a godsend or be the undoing of years of hard work.

Allow me to give you a quick and easy example. Let's say that I would like to begin a skateboard selling company. I've done all the groundwork and incorporated my business. I've hired people, leased a building, bought all sorts of machinery, and invested tons of money into what I need to make this business happen. Sure, I'm flat broke at this point, but since my company will begin production tomorrow, I'll soon be raking in the cash.

Now let's say that just as soon as I fired up my machines to make the skateboards, one of my employees comes in to my office and tells me that the government just began a trade war with China, so we won't be able to import any skateboard wheels like we wanted to. "Oh well," I say. "Let's make them ourselves." "We can't," says the employee. "The government also just made a new regulation against using the raw materials we would need to make the wheels." At this point, if I couldn't find another place from which to import the wheels and if I couldn't lobby congress to either change the regulation against using the raw material I need to offer me some special exemption, I'm out of luck. All that spending and preparation will have been for naught. Pretty bad, right?

Here's another regulation for you and this type of situation is more common than you think. Let's say I'm the CEO of a huge wealthy oil company. I've hired lobbyists to represent my company in Congress for decades. I'm best friends with senators and congressmen and we've gone on far too many golf outings together. A few days ago, I caught wind that a competitor would like to open a new oil field in Alaska. I quickly got on the phone and called a few of my buddies in the government. I asked them to create a new environmental regulation that would forbid my competitor from moving forward with his new oil field. Yes, that's how business operates.

In general, government regulations are meant to level the playing field. They will always be there and they'll always bend and twist markets in different ways. And no matter how anyone tries to portray a particular market, it will never be absolutely free. There's no such thing as a free market. There can be levels of freedom, but if there were such a thing as being completely free, that market and those around it would be thrown into chaos. Just picture a factory pouring its toxic waste into a nearby river. Forever. It's simply an unsustainable idea. In general though, market oriented economies have fewer regulations and command type economies have more.

So, what do some of our current and past regulations do? Well, they do a whole lot. Think about the banking and health care industries. These are two of the most highly regulated industries on earth. Partly because they're so consumer focused, but also partly because they're so wealthy and don't like competition. As stated above, many regulations have been written to keep competition away. Otherwise, they are oftentimes intended to reduce or eliminate intellectual property theft, protect consumers from any number of things, help enforce contracts, prevent fraud, and aid in the collection of taxes (government revenue). In the most basic sense, every type of economy uses a market to operate, even the most top-down command economies of the world. If someone sells something that someone else buys, no matter how regulated the transaction is, a market is at play. It's just that working within a market that has fewer regulations can sometimes be easier. We've all heard of those countries that require an individual to wade through 18 different bureaucratic agencies just to obtain a business license. Those are command economies at work. The thing is, while it may be quicker and easier to launch a business in a market with few regulations, it's also easier for the competition to take you out in unscrupulous ways.

If an economy is too regulated, people begin finding other ways to do business and these ways oftentimes won't have government approval. These types of activities usually occur in a black market or what's referred to as an underground economy.

Economies change all the time. They ebb and they flow, depending on what's called for at the moment. This is why legislators continuously work on adding and removing regulations and tweaking the ones that already exist. It's sort of like a balancing act. Those who are in control of such things need to consider the relationship between the freedom a market experiences and its regulatory burden.
 
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